Category Archives: Spicy Pickle Inc SPKL

Spicy Pickle Franchising Inc. (SPKL.OB) is a casual dining restaurant chain. Spicy Pickle restaurants serve high quality meats and fine Italian artisan breads, a wide choice of ten cheeses and a variety of spreads and toppings to create healthy, tasty panini and sub sandwiches with flavors from around the world.

Spicy Pickle offers menu items that are far beyond traditional fast food, but without the higher prices of most casual dining restaurants. The company is expanding rapidly, and recently opened their 42nd restaurant in Michigan. Michigan represents the 14th state that the company is now operating in. Spicy Pickle’s goal is to expand into nearly all of the 50 states.

Spicy Pickle is actually doing quite well, despite the current economic environment. In the company’s last earnings report issued in April, Spicy Pickle showed an increase in same store sales of 5% and an increase in revenues of 4.64%. This is remarkable in light of the current economic slowdown. Many other casual dining restaurant chains are showing a drop in both sales and revenues. Any upturn in the economy should boost Spicy Pickle’s numbers even further.

Fast Casual magazine has released its annual list of the Top 100 Movers & Shakers in the Casual Dining industry, and this year Spicy Pickle™ restaurants has been named to the number 25 spot for 2007. The list ranks the most influential fast casual restaurant chains in the U.S., and over 450 chains were judged on a variety of factors, from marketing tactics to comp and revenue to unit strength, by a panel of six restaurant industry experts.

In additional to being evaluated and selected, it is an additional honor to be among the top 25, as the publishers of this list take into account the company’s unit size and revenue growth. In the case of Spicy Pickle, they had a great year in 2007 which was headlined by an initial offering of public stock. Fast Casual magazine lauded the $1.74 million raised in Spicy Pickle’s September IPO, noting that it occurred “in an economy when Wall Street wasn’t always kind to restaurants.” Other highlights included: raising nearly $6 million in a private securities offering; 39 franchise developments sold during the year; and 20 new stores opened, bringing the Spicy Pickle system to 36 stores in 12 states.

“Spicy Pickle is widely seen as one of the most promising young concepts in the fast casual segment of the restaurant industry. Our recent success, combined with Fast Casual magazine’s ranking, pays testimony to the momentum we’ve established,” said Marc Geman, President and CEO of Spicy Pickle Franchising, Inc. “All of us at Spicy Pickle look forward to continued implementation of our long-term growth plan in 2008, which will allow us to bring our culinary-inspired menu to more people, in more places, than ever before.”

The hallmark of a Spicy Pickle restaurant is quality, service and an enjoyable atmosphere, underscored by a menu that includes a mix of paninis, subs, Neapolitan pizzas and salads. Its insistence on quality throughout its business has made Spicy Pickle a favorite of both patrons and industry analysts, not to mention investors.

The corporate restaurant chain of Spicy Pickle (OTCBB: SPKL) recently announced that they have sold the rights to develop seven Spicy Pickle restaurants in San Antonio, Texas.

With the sale of the seven new restaurants, Spicy Pickle now has a total of 128 franchise and corporate restaurants. Currently the Company has 36 restaurants open and many more in construction, lease negotiations, and site selection. In the state of Texas alone, there are 25 current and future Spicy Pickle locations, more than the 23 in the home state of Colorado.

The company has multi store commitments signed in Chicago, Los Angeles, Houston, Michigan, and most recently, San Antonio. The most shocking aspect of this is that it has taken place when market conditions are taking a heavy blow.

“Our Austin, Texas restaurants have done very well, and their success fostered interest in Houston and San Antonio. Our third restaurant in Austin is close to opening, and we have begun the site selection process in Houston,” stated Marc Geman, CEO of Spicy Pickle Franchising, Inc.

“We are proving out our evolution to the multi unit ownership model. It provides efficient use of personnel, communication, distribution, and marketing. The more restaurants we build in larger areas, the easier and more cost efficient the construction, distribution, branding, marketing, and training becomes. Texas is our first state outside of Colorado where these efficiencies will start working,” he added.

Spicy Pickle Franchising Incorporated, the Denver, Colorado based company that engages in franchising and operating Spicy Pickle restaurants, has announced lease signings for five new locations today. The fast-casual restaurants that specialize in sandwiches, salads, soups, and soft drinks will be added for the first time to the states of Florida, Oklahoma and New York. The other two lease signings represent a second location in San Diego, California and a third location in Austin, Texas.

The CEO of Spicy Pickle, Marc Geman, said following the announcement, “We always try to be very careful about getting the right location, and this is particularly important for a first restaurant in a new area. Our hard work has paid off with these five leases which will bring the Spicy Pickle to three new states. Our restaurants have always generated additional interest in the area where they are located. We look forward to further expansion in Florida, Oklahoma and New York in the near future.”

These five new locations will bring the total number of franchises up to 128 in addition to the three corporate locations. The company recently announced a developmental agreement in the greater metropolitan Houston, Texas area that will call for a total of ten Spicy Pickle locations over the next few years.

The restaurants are best known for their high quality meats and fine Italian Artisan breads along with a wide choice of 10 different cheeses, 21 different toppings, and 15 proprietary spreads to create healthy and delicious Panini and sub sandwiches with flavors from around the world. They can create over 150,000 sandwich combinations; along with 8 specialty Panini sandwiches to please all customers. The company is rapidly expanding and has a very bright future on the horizon.

Spicy Pickle, Inc (SPKL.OB) announced that the company has sold a multi unit restaurant development in the Houston, Texas area. As a result, the Spicy Pickle will now have a total number of 123 running franchises throughout the United States.

This development agreement encompasses the greater Metropolitan Houston area, including the town of Sugarland. Furthermore, this development calls for a total of ten Spicy Pickle restaurants to be open over the next several years.

Marc Geman, CEO of Spicy Pickle Franchising, Inc. stated, “We continue to have a lot of interest in Texas and already have two successful restaurants in Austin with a third under construction. Texas can support a large number of stores and demographically contains a huge population base of our ideal customers. We have interest from Dallas and San Antonio, and expect Texas to be a large, if not the largest state outside of Colorado in numbers of Spicy Pickle™ restaurants.”

Mr. Geman further added, “Our new franchisee formerly operated a chain of funeral homes. While it may seem like an odd transition, there are in fact many similarities. Both business models are very customer service orientated. Our franchisee understands the competitive landscape of retail business. Having already operated a very successful chain, they are very well financed. They understand local marketing and have their staff working in the fast casual restaurant segment. They will be in a position to open restaurants as quickly as we can find suitable real estate. Our demographic program has already developed a model Spicy Pickle™ restaurant location to work in the Houston market.”

Remember how I said a few days ago to expect some big news from Applied DNA? The chart had just perked up too much to assume nothing was going on. Well, today we learned what that ‘something’ was. What was the news? We’ll get to it below. For I now just want to plant a seed.

There are two basic types of news releases I’ve seen…over-hyped, and under-hyped. I put today’s news in the latter category; the announcement was very encouraging, but I don’t think it even scratches the surface of what it could really mean for the company and its investors.

After that, we’ve got yet another ‘first down’ for Spicy Pickle. (You didn’t think I’d pass up a football reference less than 24 hours after the Super Bowl, did you?). Let’s just call this news more of the same, which is exactly what we want to see if the company is on a roll.

‘Business as usual’ can be a very good thing, if your usual business is growing a solid revenue machine. Spicy Pickle (OTCBB: SPKL) has turned out to be a great example of how good companies don’t have to worry too much about their stock’s price as long as they continue to execute the right plan.

Take today’s news as an example. They announced they’ve signed leases for two new corporate owned restaurants (as opposed to franchisees). That shouldn’t come as a shock to anybody, since they announced that was part of the plan back on December 15th. Is the news complicated? No. Is it life-changing? No. Does it show progress? Yes, absolutely. That’s my point.

If you look back closely at the news and follow-up Spicy Pickle has made, what they’ve done is real simple…they told investors what they’re going to do (i.e. total transparency), then they go do it. Brilliant, eh? A lot of other companies could learn the same lesson.

I truly believe that’s why the stock has been able to hold its ground relative to early November’s levels. Just for perspective, since November 8th, SPKL is about even. Since the same date, the S&P 500 is down 7.0%.

The major support line appears to be around $1.10, and was basically established on November 8th. Since then we’ve seen some modest accumulation days, with very little distribution. That hasn’t necessarily helped yet, but I think it hints at the underlying opinion. Consider the environment and the comparative numbers above…if SPKL can hold its ground in a very tough market, I think it could do very well when things are better.

By the way, the corporate owned stores are desirable for investors because these stores tend to make more money for the company than franchised ones do.

The franchised units send 7% of their top line sales to Spicy Pickle every week, and the average franchise ends up paying royalties of about $50K per year. The remaining profits are retained by the franchisees. The corporate-owned stores, by comparison, basically get to keep all the profit. The trade-off is involvement – when you own your restaurant, you also have to operate it. When you franchise it, someone else operates it and pays you royalties.

Marketing breakthroughs are rare because customer insights are subjective. Nevertheless, a brand is the most durable and productive asset any company can have. This company is a vintage stock investment opportunity since it combines so many consumer delights into its sandwiches and pizzas. The brand name is not only appealing, but is also a blend of the most strategic marketing values.

The company provides an unusual dining experience within an affordable price range, typically less than $10 a head for a satiating meal in a refreshing ambience. There are virtually unlimited permutations to meet individual preferences, and the appeal is to people of all ages, and across the globe.

The company has incurred enormous losses since its inception, largely because it operates its own restaurants as training hubs, from its base in Denver, Colorado. The management has decided to take this business model further, by opening a new training restaurant. The formula for future profits seems to rest on each training restaurant serving around 40 franchised outlets. It appears that the ingenuity of the company’s marketing experts is not replicated in its finance function!

Since franchise management is so central to this company’s profitable operations, the training expenses should be amortized rather than get written off altogether in a single financial year. The franchise is so valuable that some of the training expenses should be borne by beneficiaries, and the royalties could also follow a balloon pattern. This would not only improve the company’s Net Present Value for investors, but would also protect it against probable losses of know-how.

There’s nothing funny about this company’s serious growth, but I have to laugh (in a good way) about one of the footnotes from today’s Spicy Pickle (OTCBB: SPKL) news release. The announcement is more of the same…new franchisees are signing multi-store commitments. This time the agreement was for three stores in the Los Angeles area. They will be the first Spicy Pickles in the area, though I doubt the last. That’s not the big deal though…

Remember what I was saying about Spicy Pickle not just attracting a lot of franchisees, but a lot of high-caliber franchisees? Experienced restaurant veterans (with plenty of financial backing) are getting on board. Take for instance the group that made a ten store agreement for the western Michigan area. They’ve opened restaurants before, but committed to ten Spicy Pickles before they even got their first Pickle up and running. In fact, we’ve seen a lot of ‘site-unseen’ commitments like that one.

However, I think today’s news outdid all the rest. The new L.A. franchisee is also an instructor at the culinary school in Pasadena.

I don’t know the guy from a hole in the ground, but being an instructor at a culinary school, I think it’s safe to assume he’s picky about his food….what he eats, and what he sells. I’m also going to assume he’s seen enough good and bad restaurants to know what’s worth getting involved in. For him – of all people – to pick Spicy Pickle? What else do I need to say?

Anyway, by my count this brings the total number of restaurants up to 113…36 in operation, and 77 more on the way.

The number may seem like just a number, but what the market may have forgotten is this company’s progressive march towards profitability. Remember the company’s burn rate of about $200K per month? On average, each store contributes a little over $4000 to the company’s top line. Do the math here…36 stores multiplied by $4000 equals $144K per month, and I think that’s a somewhat conservative estimate. The point is, Spicy Pickle continues to walk towards an operating profit. With 77 more units on the way, I don’t think it will take much longer to get over that hump.

Move over deep dish pizza, there’s a new flavor coming to the windy city. Chicago residents have already been introduced to the Spicy Pickle’s (OTCBB: SPKL) food, now that the city’s first Spicy Pickle restaurant is up and running there. Per today’s press release though, a new franchisee wants to open five more throughout the greater Chicago area. Add ’em to the growing list of Spicy Pickles now open or on the way.

As excited as we are for Chicagoans’ taste buds (as we’ve said repeatedly, go try the food), we’re even more excited about this latest layer of expansion. The grand total of current or future restaurants now comes to 110… 33 open, and 77 more already signed for.

I’ll ask the same rhetorical questions I’ve been asking…(1) why are these franchisees signing for multiple locations before they even get the first one opened? And (2), how does a restaurant franchise system go from 26 stores to 33 stores in 15 weeks, and also have 77 more on the way for 2008?

The question may be rhetorical, but my answer isn’t – I think the company’s in high gear. The full press release is at the bottom of today’s newsletter.

So how’s the stock doing in the meantime? Take a look at the nearby chart. Seems to be on hold, as it has been for a few days. All things considered, that’s just fine – the market has taken a couple of beatings that SPKL seemed to be able to withstand. As long as it holds its ground now, I think it should stay in a good position to lead when the environment improves.

As it turns out, the $1.30 level has emerged as a support area. The $1.10 has also turned out to be an important line in the sand, though I hope we don’t have to prove it again.

Spicy Pickle (SPKL.OB) announced the grand opening of the company’s new restaurant at 1298 South Broadway, Denver. This restaurant will feature culinary-inspired sandwiches and salads and will debut the company’s new corporate training center and test kitchen. The Washington Park Spicy Pickle will offer local diners a healthy and delicious alternative for both lunch and dinner.

Tony Walker, CEO of Spicy Pickle, stated, “Our newest Spicy Pickle in Denver is a very special location. Our customers will get the very best we have to offer-especially when you consider our new corporate bakery is right next door. This location will receive lots of attention from the company, and our customers will definitely benefit through a unique and flavorful menu, top-notch service, and some of the best ideas in fast casual food today.”

Because the new South Broadway Spicy Pickle will serve as the company’s main employee training facility, customers will consistently experience enthusiastic, high-quality customer service. Additionally, Spicy Pickle operators and management teams will also flock to Denver for training, benefiting the local economy as well.

The plan became a reality for Spicy Pickle (OTCBB: SPKL) yesterday, when the company closed a financing deal that should allow them to start opening several corporate-owned stores. These stores will be in addition to the franchised stores already popping up left and right (with more on the way). The impact for shareholders is straight-forward – owning their own restaurants means the company has much better top and bottom line potential. Details of the deal are simple enough – the company raised a net of about $5.7 million by selling a combination of convertible preferred shares and common stock warrants. The convertible preferred stock can convert into shares of common stock at a fixed conversion price of $.85 per share. The warrants can convert into common stock at $1.60 per share, and are good for a period of five years.

So what does this mean for investors you ask?

The franchise model is nice, as it generates recurring revenue someone else does most of the work to create. On the other hand, owning your own restaurant – as opposed to letting a franchisee operate one – gives the company access to 100% of the top and bottom line for each store. When you start looking at the comparative math, all of a sudden the idea makes good sense.

Just to review some of the metrics from our initial profile, the average Spicy Pickle restaurant does around $700,000 in sales each year. Of that amount, about 7% is collected as royalties. So, each store annually contributes about $50,000 to the company’s top line. Since the franchisee takes care of each store’s costs, that $50K is mostly free and clear. So, while the net may seem small, the margins are huge.

But clearly there’s more profit to be generated than the $50,000 or so. (Why else would all these franchisees want to open more and more stores?) Well, by owning their own stores, the company can tap into 100% of the profit potential of each unit.

Great, but what does this really mean for investors, you ask again?

The preferred-stock piece of the deal could inject 7 million shares into the float at $.85 each, and the common sock warrants could add another 5.2 million shares at $1.60. Just for comparison, there are about 47 million shares outstanding. So, the dilution impact is low.

What I like best about the news is the warrant side of the deal…the $1.60 level is considerably higher than Friday’s close at $1.11. Therefore, the funders want the same thing all the other shareholders want – for the stock to go higher.

I know, I know…so what does this ultimately mean to you?

I estimate the amount of money they raised should be enough to open somewhere between 12 and 15 corporately-owned restaurants. That translates into revenues somewhere between $8.5 million and $10 million per year. More importantly, the company retains 100% of each store’s net income.

Just for comparison, the company did $261K in revenues last quarter – exclusively with franchises (about 27 of them at the time). Annualized, that’s a little over $1 million per year. Of course, there may be four times that number of franchises a year from now.

In the meantime, I estimate it could take about the same year to get the corporate-owned stores up and running as well.

Roughly 100 franchised units in addition to, say 12 company-owned restaurants? Yeah….I think we’re all going to look back a year from now and see phenomenal growth, making yesterday’s financing a wise and very fruitful decision. I also have to believe the company’s growth is going to be reflected in the stock’s value. Speaking of…

In recent blog entries I’ve talked at great length about the difference between investing and trading. In my memory, the most profitable market participants are the ones who understood that difference. The discussion resurfaced again when we introduced Spicy Pickle back on September 22nd. We knew its momentum at the time was mostly built on hype and newness, yet we still made some very quick money on the trade – it moved from 69 cents to $1.40 in only a few weeks, letting many of you pocket some big gains.

As I later said when I told you to lock in the gain, euphoria wears off. When it does, stocks can fall back (which is why I said to lock in the gain). Sure enough, SPKL fell back. In fact, it made a full 61.8% retracement of its big run-up. More than that, the support at the 61.8% line held up as support on Thursday, and actually pushed the stock higher again on Friday. In other words, the ‘easing’ phase after its euphoric rise may also be complete.

Now that the initial ‘trading’ is out of the way, I think we should be looking at the stock from an investor’s point of view, which is a longer-term view. However, it doesn’t mean you can’t take advantage of a short-term pricing opportunity. If you liked the company’s long-term prospects but were waiting for the perfect time to get into the stock, I think we’re there now.

That’s not to say there won’t be volatility injected again in the future. That’s going to happen over and over again. In fact, I think they have earnings coming up pretty soon, which should push the stock around pretty good. What I’m talking about is looking past the upcoming quarterly numbers, and instead looking at next year’s likely numbers. In those terms, I think Spicy Pickle is a great value at $1.34.

If you read the blog on a regular basis (as I hope you do), then you’ve already seen the short novel I’ve crafted about Spicy Pickle (OTCBB: SPKL) over the last couple of days. I’m not going to repackage those same thoughts, but I will summarize my observations.

In short, I don’t think I could be any happier about today’s response to SPKL’s earnings news. As I mentioned in Tuesday’s blog entry, I didn’t really expect their third quarter numbers to look fantastic – all the expense of going public and getting some visibility for the stock was incurred last quarter. Even though it’s a one-time expense, my worry was the market would jump to conclusions and sell it off.

I guess I underestimated investors. Like I encouraged everyone to do over the last couple of weeks, the market seems to understand this is an early-stage growth idea, and the way things are in the recent past are not the way they’re going to be in the near future.

The ‘future’ is evident in Tuesday’s news rather than Wednesday’s earnings. On Tuesday, we learned they’ve opened their 31st store, and signed leases for two more. That’s the fifth new store in seven weeks, and the company still expects to have 50 open by the year’s end. Growth, growth, and more growth. I think the fundamentals will fall right in line.

Can you say follow-through? On Monday, we pointed out how Spicy Pickle’s (OTCBB: SPKL) chart looked a heck of a lot like a bullish engulfing bar had been made with Monday’s big gain. If you missed it, or want to know what a bullish engulfing pattern looks like, just click here to review the blog entry.

Anyway, what I wanted to see on Tuesday was a move higher than Monday’s close, just to confirm that the engulfment was a valid one. It would be nice if such a gain was made on even higher volume.

Well, Spicy Pickle went two for two. SPKL gained 9 cents (8.4%), and it was on higher volume. Bullish engulfment confirmed. Today’s action is just as impressive…up 19 cents (16%) so far, after reaching a new high of $1.39.

What prompted today’s push? Progress. Spicy Pickle announced late yesterday that two more stores had opened. That brings the total of up-and-running unites to 26, with 12 more to be opened by the end of the year. A little under 50 more franchises have already been signed in addition to those 38. Am I surprised? No, not really. The company said they were going to do it, and based on the strength of their growth to date, I had no real reason to think they wouldn’t. But, if there was anybody out there doubting the expansion could or would happen, there ya’ go.

Undoubtedly many of you are now wondering about not only one gap, but two gaps on the chart. That’s a valid concern. I think the attraction to SPKL is in its long-term potential, but the short-term has probably been far better than most anybody imagined. The result is a stock with a lot of profits that could be taken by its investors. Though our coverage is for the long haul owners, I can’t say I wouldn’t understand locking down a little now. I’d still consider buying more (or again, or for the first time) on a good pullback though. In fact, the more I think about it, the original price target of $1.40 may not be aggressive enough. We’ll deal with that issue when and if we reach our suggested target, possibly by renewing the alert with different parameters. However, with a high of $1.39 already today, we may have to do just that pretty soon.

Whoever coined the phrase ‘onward and upward’ could have easily been talking about Spicy Pickle’s (OTCBB: SPKL) stock. Since last Friday’s close, SPKL has gained about 25%, and is still climbing. As amazing as that is, I’m even more amazed by how consistent – or should I say persistent – the volume has been. Monday was obviously an explosive, high-volume day…the first trading day after we (and a couple of other sites) started our coverage. Though it would be tough to rival the 2.4 million shares that changed hands that day, the market is still speaking pretty loudly with investment dollars. Each day’s worth of good volume and strong performance for the stock just further solidifies SPKL’s hold on these newly-achieved trading levels.

If you’re wondering where all this demand is coming from , then I’m going to guess you haven’t seen the brief web video. To see it, click on the nearby picture. I think it’ll all make sense then. It’s just a smart franchise concept, meeting modern consumer demands. The food’s great too…I can personally vouch for that.

Anyway, while I can say the food’s great right now, some hungry Floridians will soon be able to agree with me. Why? Spicy Pickle just announced they’ve signed a new Florida franchisee. It’s the first in the state, though I doubt it will be the last.

This first store is slated to open in the Gainesville/Ocala area. It’s a great market for a Spicy Pickle…University of Florida college students, faculty and staff, plus the big medical community there are the Pickle’s targeted demographic. In fact, I suspect we’ll see a few more pop up in Gainesville once the first one catches on. Beyond that, I think this first Florida store could also be a seed for the entire state, which just so happens to be the fourth most-populous state in the union.

As far as the stock is concerned, I really do believe the initial volatility is over. We’re starting to see higher highs and higher lows, with the gains coming at a controlled pace on stable volume. So, it seems safe to get back in the water.

Before I forget, I want to remind you about the Spicy Pickle’s (OTCBB: SPKL) web video available simply by clicking the nearby image. From the feedback we’ve gotten so far, the short video has been very helpful for investors, adding any remaining details we couldn’t get to in Saturday’s profile. Remember, it’s only a small investment of your time (the video is less than 10 minutes long), but could be one of the best investments you make all year. Anyway, here we are – two days after we launched our coverage. In a nutshell, SPKL is off to a great start.

When I saw the stock gap higher on Monday morning, I wasn’t sure what to think. I don’t mind gaps…I don’t particularly want them, but I don’t mind them. My worry was whether or not SPKL was going to take off and instantaneously be out of reach for anybody who wanted in. Fortunately, the stock found a comfort level between 75 and 85 cents on Monday, and that range was even smaller (and more bullish) on Tuesday, and it seems as if there’s some support around 75 cents.

So where to from here?

I have to say I’m fairly impressed. With Monday’s big move higher, I’m sure it was tempting for all those owners who bought shares at 50 cents (or even less than that) to go ahead and lock in a big gain, which would have driven the chart much lower. They didn’t though. In fact, we saw a few more buyers pile in today..even more than with Friday’s big rally. The stock closed out the trading session slightly higher than yesterday.

I’d like to see a higher high sometime this week to really add some solidity to the stock’s recent run. All things considered though, investors seem quite OK with the big jump so far. As far as the gap is concerned, if it does indeed get closed, I view that as another entry opportunity. At this point, however, I wouldn’t be shocked if it never got closed.

Hitting a home-run with a micro cap stock really isn’t all that difficult. All that’s required is decisive action and a willingness to take a calculated risk when the right idea comes along. Most timid investors find themselves missing out on huge winners because they take a swing too late – the peak opportunity is gone. Instead, they chase a stock after the fact for a much smaller gain. The lesson in all this comes in the form of a question…do you have the foresight and risk tolerance to take a swing before the biggest gains have been made and the company becomes a household name, or have you learned to live with the regret of missed opportunities? If you’re truly an opportunity seeker, read on. We informed everyone last week we’d be bringing our readers an idea we’re ecstatic about. Well, today’s the day. The name you’ve been waiting over a week for is ….Spicy Pickle Franchising Inc. (OTCBB: SPKL).

Simply put, this restaurant franchise is experiencing significant growth in a booming sector of the restaurant industry – fast casual dining. Why? Because it has it all …a highly profitable business model, nearly-unlimited expansion potential, and constantly-renewed consumer demand.

As of right now there are 26 of these franchised ‘quick and casual’ restaurants in operation, but 14 more are under construction. The company thinks they could add 40 more in 2008, and even more on an annual basis after that. Folks, that’s about a 100% annual growth rate.

What I like best right now about the stock is this – most other investors aren’t yet familiar with it even though it’s already got a major growth trend in place. This means you actually have a chance to get in now at a reasonable trading level before any unbridled demand drives shares much higher.

Business Model

If you know anything about restaurant chains, then you know there are two basic ways to make money with them – by franchising them, or by operating corporately-owned stores.

At the end of this year Spicy Pickle will only have one company owned store. The guys at Spicy Pickle have focused much of their attention on franchising, so they can focus on building and expanding the brand. And, the numbers behind the franchise model look really good (i.e. fruitful for shareholders).

Within their franchise model, there are two basic revenue streams. Spicy Pickle collects a one-time $35,000 fee from each new franchisee (and/or $17,000 for subsequent stores owned by the same person). And, they collect 5% of each store’s monthly sales in perpetuity. On top of that, they receive about a 2% rebate from each store’s suppliers (soft drinks, meat, etc.). With the average Spicy Pickle storefront doing about $700,000 a year, each unit adds about $50,000 per year to the corporation’s annual revenue. How long do they get to collect that revenue? Forever. Let me repeat that – forever.

So how many stores can they really open? Does 80 seem aggressive? Eighty franchises have been committed to already. How about 500? It may seem like a lot, but how many restaurants do you think there are in this country? Try 935,000. So, I feel squeezing in the first 80 or so should be a piece of cake. Frankly, I think 500 seems like a low number too, but I’ll stay tempered for now.

The next question is, will consumer demand be able to support 500 (or more) restaurants? I think the answer to that question is another resounding ‘yes’.

Like I said last weekend, the National Restaurant Association expects the ‘quick and casual’ restaurant segment (which is Spicy Pickle’s category) to see double-digit growth in 2007. There’s a reason this is one of the fastest-growing restaurants in the business. There’s a reason Spicy Pickle does more sales per square foot than comparable restaurants. You don’t need me to tell you the average consumer just can’t take another hamburger joint.

I could go on an on with the list, but I’m happy to say we can let technology do that work for both of us. As promised, we’ve got a short web video for you to watch. It tells the whole Spicy Pickle story a lot better than I ever could. Take a look by clicking here. Just be sure to come back and read the rest of our report,because we have some details the video didn’t.

Franchise Metrics

Like I mentioned, with the average Spicy Pickle storefront doing about $700,000 a year, each unit adds about $50,000 per year to the corporation’s annual revenue. So, when the remaining stores currently under construction are completed and the total number of storefronts is 40, we’re looking at about $2.0 million per year in revenue royalties. The one-time franchise fees are added to that total.

Not a big number? It’s all perspective. Remember, those are flat-out royalties…100% gross margin. The restaurant operators pay the expenses associated with running the store.

The other thing to keep in mind about the revenue model is something I already mentioned. There are 26 up and running, 14 units under construction, and there are 40 more waiting to start construction. Let’s just call it 80 stores by the end of 2008. At that point, we’re talking about $4.0 million in recurring annual royalties and rebates – with huge margins. As same store sales improve, so too will the royalties. (And again let’s not forget the one-time franchise fee is also booked as revenue.)

By the way – and this is the exciting part – the current burn rate is about $200K per month. I estimate when they get about 45 stores up and running, they’ll be able to cover all their overhead, and start generating positive cash flow. This is likely to happen sometime in 2008…just around the corner.

Valuation

As far as capitalization is concerned, this is one of the most investor-friendly I’ve ever seen (and I’ve seen a lot). There are about 12.2 million shares in the float, and 45 million outstanding. The current market cap is right at $31.3 million when shares are at 69 cents. There’s no debt. Potential dilution? Don’t worry about it ….there are no warrants or convertibles, and only a few employee options. What a breath of fresh air!

Now, let’s put some of the numbers together and see what the stock could likely be worth in the not- too-distant future.

(Granted, this is my rough math, but you’ll get the idea. Also bear in mind the franchise model – this one in particular – doesn’t lend itself to normal valuation modes. In this case, I’d equate Spicy Pickle’s revenue stream more to an annuity than anything else.)

At 80 or so stores, we’re looking at $4.0 million in annual sales. Take out about $200K per month for overhead. In fact, let’s raise the overhead to $250K per month when there are 80 stores to run (a decent guess). That still leaves a nice profit margin. Now, at 500 stores, the company could be pulling in more than $25 million in annual royalties and rebates. At that point, let’s hypothesize that monthly overhead is $400K. That still leaves a net margin of $20.0 million.

A company the market values at $31 million could be annually bearing nearly $20 million (net) when there are 500 stores? A true P/E ratio doesn’t apply to a franchise model like this, but if it did, we’re looking at a ratio of somewhere around 2.

Like I said though, I think the real value of Spicy Pickle’s lies in its recurring income and strong margins. You know what the annual payment would be on a $30 million annuity paid out over a span of thirty years? At an average return of 12% per year, the annuity would only pay $3.3 million per year. That’s a far cry from the kind of numbers SPKL could be producing in just a few short years, and they’d be doing it forever.

Obviously this is an equity and not an annuity, and includes all the risks involved. But, the rewards built into the model seem to be incredibly enticing.

What’s The Stock Worth?

I trust that you’ve watched the video by now. If not, I urge you to go back and do it. Remember, if you agree with us about The Spicy Pickle’s potential evident in the video, a small investment of time today could mean potentially blockbuster returns later.

As for a suggested target, based on the math we did above, we think SPKL could get to $1.40 by sometime in 2008. That’s about a double from current trading levels.

An aggressive target? I don’t think so. The market cap would be around $60 million when shares are at $1.40. But, as discussed in my calculations, the company could back that valuation up pretty nicely. Actually, between the real estate, property, branding, and a reliable revenue stream (even with only a handful of operating stores), I feel an enterprise value of $60 million may actually still be too low.

As for a protective stop, I think 48 cents leaves ample room for SPKL to move.

One final thought …a question, really. Would you rather become an owner when there are 26 restaurants, or 80? When there are 80, or 500? When there are 500, or 1000? Ray Kroc started an empire known as McDonald’s when he essentially replicated one fast-service restaurant he was so impressed by in 1954. Now there are more than 30,000 golden arches all over the world. The stock has returned more than 15,000% since 1970.

Is the Spicy Pickle the new McDonald’s? Nobody can say for sure, but I do know the growth has already been superb, and appears as if it will actually accelerate over the next few years. I also know that waiting for any company to hit its peak is also a recipe for missing out on the best periods of growth for the stock…it’s just too late then – the market has doled out the lion’s share of the rewards.

To really take advantage of an opportunity, true risk-tolerant investors have to be willing to take action early on, when things are just getting started. The alternative is to just continue to hold onto other stocks that may be past their explosive growth phases, and suffer from mediocrity.

I think the window of opportunity for SPKL will still be open early this coming week, but not much longer than that. If you’re going to stake your claim, I believe the best time to do it is now.